A2 - M7 Materiality

Question 1

Which of the following statements is not correct about materiality?

A.Option A.
An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

B.Option B.
The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

C.Option C.
Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

D.Option D.
An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.

Answer 1

An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. (Smallest aggregate level not largest)

Question 2

Which of the following statements is correct concerning materiality in a financial statement audit?

A.Option A.
The auditor’s materiality judgments generally involve quantitative, but not qualitative, considerations.

B.Option B.
Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

C.Option C.
Analytical procedures performed during an audit’s review stage usually decrease materiality levels.

D.Option D.
If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests.

Answer 2

Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Question 3

While planning the audit strategy for the current audit, the auditor establishes the materiality for the client’s financial statements taken as a whole. Which of the following is incorrect regarding the process in which the auditor actually determines the level of materiality for the financial statements taken as a whole?

A.Option A.
No specific dollar amount of materiality threshold is required to be established.

B.Option B.
Materiality is based on the smallest level of misstatement for any one financial statement.

C.Option C.
Both quantitative and qualitative factors are considered.

D.Option D.
The auditor uses his or her professional judgment when assessing materiality.

Answer 3

No specific dollar amount of materiality threshold is required to be established. (dollar amount is needed to compare too)

Question 4

As part of developing an audit strategy for an existing client, the auditor may determine a materiality level for all the following, with the exception of:

A.Option A.
Transaction cycles with misstatements in the prior year’s audit.

B.Option B.
Certain classes of transactions.

C.Option C.
Financial statements as a whole.

D.Option D.
Performance materiality.

Answer 4

Transaction cycles with misstatements in the prior year’s audit. (no seperate materialty for this occasion but a seperate materialy for FS as a whole, certain classes and transactions, and performance materialty are acceptable)

Question 5

Which one of the below statements best describes the concept of materiality?

A.Option A.
Information that is not likely to influence the decisions of a reasonable investor.

B.Option B.
Information that is likely to be viewed by a reasonable investor as altering the mix of available information.

C.Option C.
Information that meets strict quantitative thresholds.

D.Option D.
Information that directly impacts the income statement.

Answer 5

Information that is likely to be viewed by a reasonable investor as altering the mix of available information.

Question 6

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

A.Option A.
The assertions that are embodied in the financial statements.

B.Option B.
The anticipated sample size for planned substantive tests.

C.Option C.
The entity’s financial statements of the prior year.

D.Option D.
The results of the initial assessment of control risk.

Answer 6

The entity’s financial statements of the prior year. (provides a basis initially especially for existing clients)

Question 7

Which of the following statements is correct with regard to the consideration of materiality when an auditor is planning and performing a financial statement audit of an issuer?

A.Option A.
When the reevaluation of materiality results in a significantly lower amount than initially established, an auditor would generally not modify audit procedures.

B.Option B.
When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods.

C.Option C.
An auditor should determine a tolerable misstatement threshold at the overall financial statement level, but not at the account or disclosure level.

D.Option D.
An auditor does not need to express materiality as a specified, quantitative amount.

Answer 7

When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods. (ensures materiality isn’t over or under stated)

Question 8

An auditor of an issuer should determine the amount of tolerable misstatement for assessing risks of material misstatement at which of the following levels?

A.Option A.
Financial statements as a whole

B.Option B.
Total assets

C.Option C.
Account

D.Option D.
Total revenue

Answer 8

Account (FS is to broad what part of the FS?)

Question 9

Tracy, senior accountant at JFM CPA Firm, is determining the performance materiality for her client in Year 2. Tracy expects that there will be a high likelihood of uncorrected and undetected misstatements.

JFM CPA Firm’s materiality guidelines advise the auditor to set performance materiality in the range of 50 percent to 70 percent of overall materiality based on the likelihood of misstatement. Tracy has calculated overall materiality at $140,000.

Tracy will most likely set performance materiality closest to:

A.Option A.
$140,000

B.Option B.
$168,000

C.Option C.
$98,000

D.Option D.
$70,000

Answer 9

$70,000 (since high risk audit go with lower of materiality percentage)

Question 10

If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should:

A.Option A.
Lower the materiality level, but not raise it.

B.Option B.
Raise the materiality level, but not lower it.

C.Option C.
Not change the materiality level once it has been established.

D.Option D.
Raise or lower the materiality level as appropriate to the situation.

Answer 10

Raise or lower the materiality level as appropriate to the situation.

Question 11

According to PCAOB standards, when would a company be least likely to reevaluate established materiality levels or tolerable misstatements?

A.Option A.
There is a substantial likelihood that misstatements of amounts less than the materiality level established for the financial statements as a whole would influence the judgment of a reasonable investor.

B.Option B.
The client has stated that it will not be able to respond to the auditor’s request for evidence within the prescribed timeframe.

C.Option C.
Changes that occurred after the materiality levels were originally set are likely to affect investor’s perceptions about the company’s financial statements.

D.Option D.
Materiality levels and tolerable misstatement were originally based on estimated or preliminary financial statement amounts that differ significantly from actual amounts.

Answer 11

The client has stated that it will not be able to respond to the auditor’s request for evidence within the prescribed timeframe. (extensive to submit documentation from client wouldn’t change materiality levels)

Question 12

When there is a group audit, the group engagement team should make a preliminary assessment of materiality. Which of the following is not an accurate statement of the engagement team’s responsibilities when assessing materiality?

A.Option A.
Determine component materiality for those components on which the group engagement team will perform an audit.

B.Option B.
Develop a threshold at which anything above would not be considered trivial to the group financial statements.

C.Option C.
Ascertain materiality levels for specific classes of transactions, balances, or disclosures for group financial statements for which misstatements of lesser amounts than the group financial statements taken as a whole could influence user’s economic decisions.

D.Option D.
Assess materiality for the group financial statements as a whole, without an assessment of performance materiality.

Answer 12

Assess materiality for the group financial statements as a whole, without an assessment of performance materiality. (group engagement team should assess performance materiality)

Question 13

In order to reduce the risk that the aggregate of undetected misstatements in the group financial statements of a nonissuer exceeds the materiality for the group financial statements as a whole, an auditor should establish a:

A.Option A.
Materiality for the group financial statements that is lower than the component materiality.

B.Option B.
Materiality for the group financial statement that exceeds prior-year materiality for the group financial statements.

C.Option C.
Component materiality that is equal to the materiality for the group financial statements.

D.Option D.
Component materiality that is lower than the materiality for the group financial statements.

Answer 13

Component materiality that is lower than the materiality for the group financial statements. (example subsidiary materiality level should be lower than the overall FS group materiality level so when you do the overall FS group materiality misstatements it doesn’t trigger an unwarranted amount of misstatements coming from the component aka the subsidiary)

Question 14

An auditor determined materiality for planning purposes before year-end based on a nonissuer entity’s prior-year financial statements. During the audit, the auditor learns that the actual financial results are significantly different from those of the prior year because of a merger. The auditor’s most appropriate response would be to:

A.Option A.
Reevaluate the sufficiency of audit procedures performed in the prior-year audit.

B.Option B.
Reperform audit procedures completed before year-end.

C.Option C.
Revise materiality for the financial statements as a whole.

D.Option D.
Reassess the risk of material misstatement to determine whether detection risk remains appropriate.

Answer 14

Revise materiality for the financial statements as a whole.